- CFTC and SEC Settle Charges with Abra
- Louisiana Enacts Virtual Currency Company Law
- Twitter ‘Hack’ of Prominent Accounts Requests Bitcoin
- New York Department of Financial Services Superintendent Addresses Initial Feedback on proposed BitLicense Changes
- New York Man Charged with Wire Fraud Relating to a Cryptocurrency-Related Investment Scheme
- China to Test Digital Yuan on Food Delivery Platform; Beijing Local Government Releases Blockchain Plan
- Japan Considering Issuance of a Digital Yen
CFTC and SEC Issue Orders Filing and Settling Charges with Two Entities for Illegal Off-Exchange Trading and Registration Violations
On July 13, 2020, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) announced that parallel settlements have been reached with Plutus Financial Inc. (d/b/a Abra) and Plutus Technologies Philippines Corp. (d/b/a Abra International) (collectively, Abra) relating to Abra’s offering of swaps and security-based swaps from approximately December 2017 to October 2019. Abra consented to the CFTC and SEC orders without admitting or denying their findings. The settlements require Abra to pay $150,000 civil monetary penalties to the CFTC and SEC and to cease and desist from further violations of the Commodity Exchange Act (CEA) and federal securities laws, respectively.
According to the CFTC and SEC’s orders, Abra offered, accepted, and entered into digital asset and foreign-currency based contracts with users of a mobile phone application, which Abra developed and marketed. Under the contracts, users could provide Bitcoin or other forms of collateral and receive exposure to the price of certain digital assets, foreign currencies or certain stocks selected by users. Upon expiry of the contract, Abra would pay the user based on the performance of the corresponding digital asset, foreign currency or stock. Abra entered into hedging transactions with the underlying digital assets, foreign currencies or stocks to hedge the price exposure. During the relevant period, according to the orders, Abra did not charge a fee or spread for the contracts.
The CFTC determined that the contracts resembled ‘contracts for difference’ and were swaps under the CEA because they provided users with economic exposure to the value of an underlying asset but did not convey a corresponding ownership interest. Section 2(e) of the CEA requires that swaps only be entered into by eligible contract participants or otherwise be entered into on, and subject to the rules of, a designated contract market. The definition of “eligible contract participant” includes categories of entities and individuals and, in certain cases, contains monetary thresholds. Abra did not verify users’ statuses as eligible contract participants, and the contracts were not offered on a designated contract market, and therefore the CFTC found a violation of CEA Section 2(e). The CFTC also found a violation of CEA Section 4d(a)(1), which requires persons who act as futures commission merchants to register with the CFTC. Futures commission merchants include persons that engage in soliciting or in accepting orders for swaps, and accept money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result from such orders. The CFTC therefore also found that Abra’s activity caused it to act as an unregistered futures commission merchant.
The SEC similarly determined that the contracts that referenced the price of individual stocks were security-based swaps under the federal securities laws. Section 5(e) of the Securities Act of 1933 (the Securities Act) requires a registration statement to be in effect for persons offering and selling security-based swaps to non-Eligible Contract Participants, and Section 6(l) of the Securities Exchange Act of 1934 (the Exchange Act) requires transactions with foreign and U.S. retail investors in security-based swaps to be effected on a registered national securities exchange. The SEC therefore found a violation of those provisions of the federal securities laws because Abra had not filed a registration statement, and the contracts were not offered on a national securities exchange.
The orders indicate that Abra was contacted by the CFTC and SEC in early 2019 and cooperated with the CFTC and SEC’s investigations, took steps to try to limit the availability of certain contracts to non-U.S. persons, and entered into transactions through Philippine-based Plutus Technologies Philippines Corp. as the counterparty, rather than California-based Plutus Financial Inc. However, the CFTC and SEC found these steps to be insufficient to prevent violations of the relevant provisions of the CEA and federal securities laws. Both the SEC and CFTC found that Abra employees in California played a significant role, including designing the swap contract, setting the contract’s price, and establishing the hedging mechanism. The SEC Order also found that at least some U.S. persons entered into contracts with Abra International, and that Abra employees effected stock and ETF purchases in the U.S. to hedge the security-based swap contracts.
CFTC Commissioner Dan Berkovitz issued a supporting statement accompanying the CFTC’s press release. The statement highlights the CFTC’s role in regulating cross-border swaps trading and its authority to apply and enforce relevant provisions of the CEA when wrongful conduct occurs in the U.S., regardless of the location or status of the counterparties. The SEC’s press release also included reference to the overseas aspect of the activity.
Click here for the CFTC’s press release and order, and here for Commissioner Dan Berkovitz’s supporting statement. Click here for the SEC’s press release and order.
Louisiana Enacts Virtual Currency Company Law
On July 13, 2020, the Louisiana governor enacted a new law that imposes a licensing requirement on entities that engage in virtual currency business activity (the Law). The Law is scheduled to be effective from August 1, 2020. The Law’s provisions materially reflect many of the provisions that formed part of the Uniform Law Commission’s proposed Virtual Currency Business Act, which was the subject of a multi-year drafting effort dating from 2015. The Law’s key definition of “virtual currency business activity” is as follows:
“(a) exchanging, transferring, or storing virtual currency or engaging in virtual currency administration, whether directly through an agreement with a virtual currency control services vendor; (b) holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals; (c) exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following: (i) virtual currency offered by or on behalf of the same publisher from which the original digital representation of value was received; or (ii) legal tender or bank credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.”
The Law further defines “virtual currency” as: “a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender, whether or not denominated in legal tender,” but excludes from this definition merchant reward programs and digital representations of value issued by or on behalf of a publisher and used within a games platform.
Licensees are subject to examination by the Louisiana Office of Financial Institutions and surety bond requirements “based on the nature and extent of risks in the applicant’s virtual currency business model.” The Law prohibits licensees from engaging in unfair, deceptive or fraudulent practices and provides the Louisiana Office of Financial Institutions with enforcement authority. The Law also includes a concept of a “reciprocity agreement” with other states that license virtual currency business activity. Licensing applications will be accepted through the National Mortgage Licensing System.
The Law states that it will not apply to the exchange, transfer, storage of virtual currency or virtual currency administration to the extent the activity is governed by certain other federal and state laws, including the federal Electronic Fund Transfer Act, the Exchange Act, the “Commodities Exchange Act” [sic], and the Louisiana Securities Law. The Law contains a de minimis exemption for persons whose volume of virtual currency business activity will not exceed USD 35,000 annually (in the USD equivalent of the virtual currency). Such persons may engage in business without a license provided that they notify the Louisiana Office of Financial Institutions and otherwise meet certain statutory requirements. The Law also contains exemptions for categories of certain categories of service providers, such as attorneys and title insurance companies.
Click here for the text of the Law and here for a Block article on the Law’s progression through the Louisiana state legislature.
Twitter ‘Hack’ of Prominent Accounts Requests Bitcoin
Twitter was the subject of a cyberattack on July 15, 2020, that enabled an unknown person or persons to send tweets from the accounts of well-known personalities with verified accounts on the site. Affected accounts included Apple, Inc., Elon Musk, Kanye West, Barack Obama, Joe Biden, cryptocurrency exchanges and many others. The tweets announced a fake giveaway campaign, and asked people to send Bitcoin to an address (presumably) controlled by the attacker. The attacker’s address received approximately $120,000 in Bitcoin. Media reports indicate that the Federal Bureau of Investigation and the New York Department of Financial Services are investigating the cyberattack. FinCEN also issued a public alert in connection with the scam on July 16, 2020.
Click here for a Wall Street Journal article on this development, here for a CoinDesk article, here for a Verge article, and here for the associated FinCEN alert.
New York Department of Financial Services Superintendent Addresses Initial Feedback on Proposed BitLicense Changes
In an interview on July 14, 2020, as part Global Digital Finance’s ‘Global Leaders Webinar Series,’ Linda Lacewell, the superintendent of the New York Department of Financial Services, indicated that the reception to the recent proposed changes to the Department’s BitLicense regulations has been positive. She stated, “the reaction has been very positive, and beyond positive,” and also stated “we’ve even had some licensees tell us that they’re very excited and interested in pursuing additional licensing with other potential parties that are all partners in the space.” In her interview, she also spoke about her desire to see the industry work to have innovators locate in New York.
Click here for a CoinDesk article on this development. Prior coverage of the proposed changes to the BitLicense in the Week in Review series can be found here.
New York Man Charged with Wire Fraud Relating to a Cryptocurrency-Related Investment Scheme
A New York man was arrested on July 16, 2020, on charges of wire fraud relating to an alleged fraudulent investment scheme that involved digital assets totaling $4.5 million. According to the complaint, the accused sought loans for business or cryptocurrency trading purposes and used the funds on cryptocurrency gambling sites. The charge stemmed from an investigation conducted by the Federal Bureau of Investigation.
Click here for the Department of Justice’s press release and complaint, and here for a Block article on this development.
China to Test Digital Yuan on Food Delivery Platform; Beijing Local Government Releases Blockchain Plan
According to a report in Bloomberg on July 14, 2020, China’s central bank is planning to test its digital currency on platforms operated by Meituan-Dianping, a food delivery platform. According to Bloomberg’s sources, Meituan has been in talks with a research wing of the People’s Bank of China on real-world uses for the proposed “Digital Currency Electronic Payment” or “DCEP.”
Separately, on July 16, 2020, the Beijing local government released a blueprint relating to the city’s plan to become a hub for blockchain innovation over the next two years. The blueprint is aimed at making Beijing one of China’s first cities to integrate blockchain technology into the strategic development of the city.
Click here for a Bloomberg article on the digital Yuan test development. Click here for a Block article on the Beijing local government development.
Japan Considering Issuance of a Digital Yen
According to a report in the Nikkei on July 15, 2020, the Japanese government and the Bank of Japan are accelerating their examination of a digital Yen, and it will be included in the government’s policy framework for the coming year. In January 2020, the deputy governor of the Bank of Japan stated that while the Bank of Japan had no immediate plans to issue a digital currency at that time, he noted that the speed of technical innovation is very fast and that public demand for a central bank digital currency could rise in Japan, depending on developments in the world of settlement systems.
Click here for a Block article on this development. Prior coverage of the statement of the deputy governor in the Week in Review series can be found here.[View source.]